Special Report: Disclose directors’ remuneration at subsidiaries as well

WHEN it comes to disclosing remuneration for directors and key management personnel at public-listed companies, the spotlight naturally fell on how well the CEO and executive directors of the listed entity were paid.

In principle, these enhanced disclosures are meant to help shareholders make an informed decision when voting to approve directors’ pay at annual general meetings. They are also meant to help investors have a better understanding of nthe link between senior management’s remuneration and the company’s performance.

Before going into the merits of deeper disclosures, we first look at what looks like a basic difference in interpretation of what counts as directors’ remuneration at the group and company level when companies report the aggregated figure in their respective financial reports. (In general, “group” figures include the subsidiaries while “company” refers to only the listed entity.)

As Bursa Malaysia’s listing rules currently require a listed company to disclose only the remuneration of directors of the listed issuer, a number of companies have chosen to count only compensation related to directors of the listed entity when tabulating the aggregate figures of how much a group spends on directors’ fees. It is only when the director of a listed company is also a director at a subsidiary that the fee paid to him is counted and disclosed at the group level.

This means that the “group” figure for remuneration of directors may not include the amount paid to directors of subsidiaries who are not also directors of the public-listed entity. The pay for a subsidiary’s directors is also not captured under “company” (as it refers to the holding company) and is assumed to be cumulated with other costs or overheads.

But there are a few companies that include what it pays directors at subsidiaries under the aggregated or cumulative “group” figure, even if he or she is not a director at the listed entity.

Malayan Banking Bhd is an example of a company that went above what is required, which is why it disclosed its BOD remuneration at a very high RM87 million in 2017 versus CIMB Group Holdings Bhd’s RM16.9 million. The latter’s disclosureis not wrong, however, according to current regulation and requirements.

“Whilst the exchange notes that information relating to remuneration of directors in the subsidiaries’ boards (who do not sit on the listed company’s board) may be of interest to some investors, such disclosure should not be mandated in the annual report of the listed company, since remuneration of such directors would be subject to shareholder approval in the respective subsidiaries, and not by the shareholders of the listed company. Therefore, the disclosure of such information remains a voluntary practice. This is in line with Bursa’s regulatory approach, which is internationally benchmarked and advocates a balanced and proportionate framework to provide adequate investor protection and market transparency while facilitating business and innovation among public-listed companies,” a Bursa Malaysia spokesperson told The Edge in an emailed reply.

When shown Notes 42 and 43 of Maybank’s 2017 annual report, a seasoned practitioner familiar with regulations described the bank’s disclosure as “super best practice”.

“Companies are already complaining about high compliance costs. I agree that Maybank’s level of disclosure is certainly encouraged but there are many practical questions. There are also people who argue how meaningful [a larger number is] when there is no breakdown of how many subsidiaries or directors there are. Do we also start to require band disclosures for subsidiaries as well? Where do you stop?” the seasoned practitioner says.

Yet, should Maybank’s higher level of disclosure be optional rather than mandatory?

“Companies include earnings from subsidiaries when counting group profits, so why should compensation to directors be any different? Whether or not they are directors of the listed entity, the fact remains that what the group spends on director fees is not just what is paid to directors of the listed entity but also the amount paid to other unnamed directors at subsidiary level,” a senior executive familiar with accounting practices says.

“For sure, there will still be reasons some companies have higher figures than others, but at the very least, everyone’s group figures would include what is paid to directors as subsidiaries, which is not the case now.”

In short, what Maybank has done is to provide a breakdown of what each director of the bank (holding company) is paid as well as a cumulative figure of what directors of its subsidiaries are paid. Maybank also provided a breakdown for executive directors and non-executive directors at subsidiary (group) level.

To be sure, there will be practical questions and valid differences, even when comparing remuneration expenses between companies in the same industry or sector.

“A car company going into a niche area such as autonomous vehicles may spend a lot more on remuneration compared with a traditional [business-as-usual mode] car company… a head of compliance may be a director at Bank A but someone in the same position may not be a director at Bank B, so the difference [in categorising] may also result in a difference in the aggregate figure,” the practitioner adds.

Even so, are those reasons enough to maintain the status quo by allowing companies to disclose only the aggregate figure of what they pay directors of the listed entity and not others at subsidiary level?

These questions are among those that have cropped up as Malaysian public-listed companies are expected to comply with the newly enhanced Malaysian Code of Corporate Governance (MCCG) released in April 2017, which asks that companies disclose, on a named basis, remuneration of individual directors and top five senior management personnel.

While compliance with the MCCG is not mandatory, amendments to the listing rules in November 2017 means that listed companies would need to explain any non-compliance with governance standards in their annual report.

Fearing the details

To be sure, pay is a sensitive issue, more so in parts of the world where income disparity is high and security is a concern.

“Many companies would rather not comply with the disclosure standard to avoid drawing attention to a few persons’ [high] salaries and possibly expose their family members [to kidnapping],” the seasoned practitioner say.

“I know of a director who does not even trust a driver to pick up his daughter and insists on fetching her from school himself,” he adds.

Disclosure of remuneration amounts also remains weak across the Causeway in Singapore, according to research by corporate governance advocate and NUS Business School associate professor Mak Yuen Teen and MBA graduate Chew Yi Hong.

The study, published in January and supported by the Singapore Exchange (SGX), covered the annual reports of 609 companies published between August 2016 and July 2017 for the financial years ending between April 2016 and March 2017.

“Within the same market cap group, companies with higher remuneration tend to be less transparent in remuneration disclosures. Companies often cite fear of poaching for not fully disclosing remuneration. Fear of poaching would imply that companies are paying below the market. Our findings do not support this. On the contrary, they are consistent with companies that disclose less may be trying to avoid drawing attention to relatively higher remuneration,” a statement dated Jan 11 on the research findings read.

Among other things, the researchers recommended that the Singapore Code of Corporate Governance “be enhanced by clarifying that the remuneration amounts and components shown in the remuneration table should include remuneration paid at the subsidiary level and the fair value of share options/shares granted”.

Other remuneration-related disclosure recommendations by the researchers include disclosing remuneration of the group’s top five highest paid executives — either individually or in total — rather than just the top five persons in key management positions (apart from the CEO and directors).

They also reckon that regulators should also consider requiring or recommending the disclosure of total remuneration to controlling shareholders and family members to provide a better safeguard against excessive remuneration in founder- and family-controlled companies.

An earlier study commissioned by the SGX published in 2016, involving annual reports of 545 companies for financial years ended July 1, 2014 to June 30, 2015, found only 31% of companies disclosed the exact amount paid to directors and CEOs on a named basis. Most companies reportedly cited confidentiality concerns and fear of poaching by competitors for non-compliance and also did not provide guidance on how performance and remuneration are aligned.

Compliance on these matters would understandably take time.

Disclosing an aggregate figure of what the group actually pays executive directors and non-executive directors at both the holding and subsidiary level — including for directors who do not sit on the boards of the holding company — however, does not expose anyone to untoward security concerns.